Theory-Based Models
Theory-Based Models
Theory-Based Models
A reduced-form inflation-unemployment relationship used to study slack, inflation expectations, and supply disturbances.
Theory-Based Models
A compact route for tracing how unemployment gaps, anchored inflation, and supply shocks shape the inflation tradeoff.
Variables
Current inflation rate.
Current unemployment rate.
Unemployment consistent with stable inflation.
Assumptions
The slope is a short-run relationship, not a permanent free lunch.
Once expectations or supply conditions adjust, the curve can shift.
Inflation is anchored around expectations or baseline inertia.
That anchor matters as much as the unemployment gap.
Parameters
Expected or anchored inflation level.
How much inflation responds to unemployment gaps.
Slack consistent with stable inflation.
Cost-push or supply-side inflation disturbance.
Observed unemployment used for the active point.
Shock presets
Lower unemployment moves the economy up the curve.
Shifts the whole relationship upward.